Access our quick product overview videos

See it in Action

Access our quick product overview videos

See it in Action

Lease accounting disclosures: 6 tips for successful ASC 842 reporting

By September 9, 2021Lease Accounting

Under the FASB ASC 842 standard for lease accounting, organizations face significant changes including both new disclosures and specific requirements for how to report those disclosures.

For instance, in the first year of ASC 842 adoption, public companies must provide the annual disclosures required by the new accounting standard in each quarterly report. That is, they must include the disclosures in their first, second and third quarter Form 10-Q filings. (See also tip #6 below.)

Thinking ahead and planning for disclosure requirements is crucial for initial ASC 842 adoption as well as ongoing compliance. It helps to ensure that lease accounting and reporting are thorough and accurate.

In this blog, we offer 6 tips on what to disclose in ASC 842 reporting. These tips can help you meet the new requirements and satisfy auditors, whether your organization is:

  • Preparing for compliance and for issuing your first financial statements under ASC 842
  • Post-ASC 842 adoption and looking for ways to improve the reporting process moving forward

Tip #1: Disclose how you determined your lease discount rates.

Are lease discount rates relevant to your financial reporting? If so, the ASC 842 standard requires you to disclose how you determined those rates, including any related assumptions and judgments.

For most lessees, the discount rate is their incremental borrowing rate (IBR). However, providing a generic disclosure that just repeats the ASC 842 definition of IBR will not satisfy this disclosure requirement.

Instead, you should provide specific information on how you determined the IBRs reflected in the measurement of your leases, including: 

  •     What inputs you used
  •     What adjustments you made to those inputs in estimating your discount rates
  •     Whether you took a portfolio approach, determining an IBR for a group of leases

Tip #2: Determine the ROU asset carrying amount in your operating leases.

Unless the value of a right-of-use (ROU) asset in an operating lease is impaired, you need to determine the carrying amount of the ROU asset from the date the lease started through the end of the lease term.

You can do this using one of two methods:

Method 1: Derive the carrying amount of the ROU asset from the carrying amount of the lease liability at the end of each reporting period as follows.

Method 2: Calculate ROU asset amortization as the difference between the straight-line lease cost for the period (including amortization of initial direct costs) and the periodic accretion of the lease liability using the effective interest method as follows.

Tip #3: Disclose if you chose to not separate lease and non-lease components.

An ASC 842 practical expedient allows companies to save time by calculating the value of fixed lease payments without having to perform an allocation to the lease and non-lease components.

However, if you choose to take advantage of this practical expedient and not separate lease components from non-lease components, you must also:

  • Disclose that you elected to apply this practical expedient
  • Disclose the class(es) of underlying assets for which you elected it — for example, perhaps you applied it to all your real estate leases but not your equipment leases

Read more about this and other practical expedients in our blog ASC 842 Practical Expedients and Transition Requirements.

Tip #4: Disclose variable lease costs and short-term lease costs separately.

The lease accounting standard under ASC 842 requires that you disclose your variable lease costs and short-term lease costs separately rather than as a single amount.

Where do variable short-term lease costs belong?

Since it is not uncommon to have short-term leases that include variable payments, you might wonder: Should you disclose these costs along with other short-term lease costs? Or should you include them with variable lease costs?

As a rule, you should disclose variable short-term lease costs with other short-term lease costs. However, since ASC 842 is not clear in this regard, disclosing variable short-term lease costs with variable lease costs would also be acceptable.

Either way, be sure to disclose where you choose to include variable short-term lease amounts in your quantitative lease cost disclosures.

What qualifies as a variable lease cost?

It is important to disclose all amounts that meet the definition of variable lease costs. That is,  disclose not only costs related to the performance or use of the underlying asset (such as percentage rent or per-usage fees), but also any other variable payments not included in the measurement of the lease liability. For example:

  • Incremental rent above the amount included in the lease liability and paid during the year due to a change in the Consumer Price Index (CPI)
  • The portion of property taxes or insurance payments attributable to the lease component — or the entirety of those payments if you elected not to separate lease and non-lease components
  • The portion of common area maintenance (CAM) charges or other service payments attributable to the lease component — or the entirety of the payments if you did not separate lease and non-lease components

Tip #5: Disclose the nature of your variable lease payments.

The ASC 842 lease accounting standard also requires companies to disclose information about the nature of their leases. This greater level of detail allows auditors, stakeholders and other interested parties to better understand a company’s leasing strategy and how its future lease payment obligations may differ from the lease liabilities on the balance sheet.

If your variable lease costs are relevant, and especially if they are a significant portion of your company’s total lease costs, you should provide detailed disclosures about those payment arrangements, including information such as:

  • Why you have a significant number of variable payments
  • The basis, terms and conditions you used to determine the variable lease payments
  • Expectations of, and the reasons for, variability in amounts owed from period to period

Tip #6: Carry forward ASC 840 comparative disclosures as required.

If your company has elected the effective date transition method for transitioning to ASC 842, you do not need to revise the financial statements for comparative periods presented before your ASC 842 adoption date, nor provide ASC 842 disclosures for periods before that date.

However, this transition method does include some important new requirements for carrying over comparative disclosures from ASC 840.

Namely, in your post-adoption financial statements, you must carry forward all the disclosures that were required under ASC 840 for comparative periods before the effective date. This includes the final disclosures of future operating and capital lease commitments prepared as of the last balance sheet to which ASC 840 applied.

You must present the disclosures that you carry forward in each set of interim and annual financial statements  — for example, in your quarterly and annual reports — issued for the year of adoption.

For accurate, consistent and thorough reporting…

Keeping these disclosures and other ASC 842 lease accounting requirements in mind as you gather and abstract your lease data will help to ensure the accuracy, consistency and thoroughness of your financial reporting.

Additionally, the use of a lease accounting solution such as Visual Lease will further help by providing a single centralized source for storing, tracking and managing lease data, with configurable tools for lease calculations and reporting, as well as integration to the balance sheet.

To learn more about the lease disclosure requirements, read our blog 3 Things to Consider When Generating Lease Accounting Disclosure Reports.

Visual Lease Logo
Visual Lease logo

Book a Meeting

CoStar Group finalizes acquisition of Visual Lease to enhance lease administration and accounting offerings. Learn More

2024 © Copyright Visual Lease. All Rights Reserved.
Privacy Policy | Legal | Careers | Contact Us